"Our government has been clear that spectrum set aside for new entrants was not intended to be transferred to incumbents," Paradis said Tuesday at a news conference in Ottawa.

His announcement comes a day after the CRTC unveiled a new code of conduct that will usher in several consumer-friendly rights in Canada, including caps on roaming and data charges, as well as an effective ban on three-year contracts.

Under the rules of the 2009 auction through which Mobilicity came into existence, any new wireless carriers were prohibited from selling their spectrum to an incumbent within five years. That came into question last month when Telus emerged with a $380-million bid to take over Mobilicity.

'It now seems inevitable that Mobilicity will go bankrupt and Public Mobile may follow.'—Dvai Ghose, Canaccord analyst

"We will not waive this condition of licence and will not approve this, or any other transfer of set-aside spectrum to an incumbent [within the five-year limit]," he said.

Mobilicity chief executive Stewart Lyons said he was reviewing the minister's announcement and will "be speaking with Telus and other stakeholders and will have more to say in due course."

The deal had already passed numerous regulatory hurdles, including approval by Mobilicity's bondholders, before Ottawa put its foot down.

Telus has more than 7.7 million wireless customers across Canada, while Mobilicity has 250,000. For its part, the company gave no indication it has any intention of trying again, either before or after the five-year window expires next year.

"Today’s decision is unfortunate for Mobilicity’s 250,000 customers, 150 employees and debt holders, who now face considerable uncertainty due to the pressing financial challenges facing the company," Telus said in a tersely worded statement Tuesday afternoon.

"Telus will drive on with our proven strategy that has served us so successfully over the years."

Rogers is currently seeking to buy unused spectrum from rivals Shaw and Videotron, two transactions that analyst Dvai Ghose of investment bank Cannacord says are also now unlikely to be approved as currently constructed, noting that Paradis said "proposed spectrum transfers that will result in undue concentration and therefore reduce competition will not be permitted."

Shaw bought their spectrum in the original wireless auction, but decided against using it to launch a wireless network, which is why it is trying to sell its space to Rogers. The strong language suggests Ottawa is likely to nix that plan as well, but the news has obvious ramifications for consumers at other companies as well.

Mobilicity and the smaller players have cash flow issues, and have expressed concerns about securing enough funding to buy the new wireless airspace that they need to compete.

Telus's offer was a lifeline to Mobilicity. Without access to well-funded backers, it's unlikely the smaller players can survive, Ghose says.

"It now seems inevitable that Mobilicity will go bankrupt and Public Mobile may follow," Ghose said in a note to clients. "More importantly, if new entrants are not allowed to be sold to the only obvious buyers – the incumbents – we wonder why investors would want to fund the independent new entrants."

Others were more positive on the news, from a consumer perspective, at least.

Lobby group The Public Interest Advocacy Centre had said Telus's move, as well as the plans for Rogers to buy spectrum from Shaw and Videotron, were bad for consumers and would stifle competition.

"The minister called the industry’s bluff," said the group's executive director, John Lawford. "This government stood up for wireless consumers today by telling the incumbent carriers that it wants consumers to be able to choose from four or more wireless carriers."

Wireless spectrum auction delayed

In a related announcement, Paradis said Ottawa has postponed the date for the government auction of wireless spectrum.

Spectrum is the infrastructure on which wireless data for mobile devices and cellphones travels.

Ottawa has been preparing to auction off a new round of better-quality 700 megahertz spectrum for years. That's the band that used to transmit analog television signals, but has since become available to disseminate new types of signals since broadcasters moved to digital transmission a while back.

Initial bids to use the waves were supposed to be in next week for an auction in November. But Ottawa has pushed the deadline back until Sept. 17, 2013, for an auction on Jan. 14, 2014.